A few weeks ago, we noted that the growing phenomenon of microfilms – motion pictures produced inexpensively with digital technology and distributed online – was becoming too popular to long avoid the attention of regulators.

This week’s update of a two-year-old regulation on the supervision of online dramas and microfilms has raised fears of stifling creativity. The broadcast administration now requires content makers to register with their real names, production companies to obtain operating licenses and report their content before it is put online, and video-hosting companies to keep records of uploaded content.

This places microfilm producers in one of two boxes: they will either be legit, or they will go guerrilla, and if they do the latter, the best avenues of distribution will be closed to them. Of all of the regulations, the last is the kicker. Video hosting companies, who thrive because the government chooses not to look too closely at whether their most popular content has been approved for broadcast, will anxious to avoid antagonizing their regulator.

Depending on how stringent the regulations are and the spirit under which they are enforced, there are two likely outcomes to these regulations: a vastly larger and more creative film industry; or the world’s largest guerrilla film market. If the government simply uses the licensing regime to turn microfilms producers into legitimate small businesses, they create a tax base and the wherewithal to fill the digital pipeline with legitimate, local entertainment. They also take a step toward turning China into the global film powerhouse the government aches to create.

At first blush, this outcome seems unlikely: why regulate if you are trying to grow an industry? In China, though, because a business license is granted for one or more specific activities, the act of regulation actually creates a channel to legitimize a business, and thus afford it the ability to operate above board. Further, if the government only requires “reporting” of content and not approval prior to posting, this alone represents a major step for filmmakers.

Even under such a regime, the government will continue order the removal of any film that steps beyond the bounds of Party propriety into forbidden topics or prurient content. That door of control remains open to them, as it is today.

If, on the other hand, the government is niggardly with microfilm licenses, or if it lays upon producers onerous approval requirements as a part of the reporting process, the result will be a community of guerrilla filmmakers and sites that distribute their works. At that point, there will be no regulating the content, and filmmakers will feel free to take on even themes that would discomfit the party.

Under a draconian implementation of these laws, distribution will not stop: it is, actually, easy to envision people sharing forbidden films via email, torrent, thumb drive or other means, from person to person, much as samizdat literature did in the Soviet Union during its final decades.

The rational choice seems to call for a robust, regulated film business that builds China’s soft power and draws its eyeballs away from foreign content. We will know within six months how this will all shake out.

I read today with great interest Louise Watt’s superb AP story about microfilms, a new medium emerging at the intersection of online video, mobile media, and digital filmmaking. Louise explains how microfilms are growing in popularity in China.

What Watt touches, and fortunately does dwell upon, is how microfilms are still quite experimental in the PRC. Beyond the artistic sense, that means that there are no laws, regulations, or administrative rules in China that officially recognize microfilms as a medium, or that provide an official framework for their creation, distribution, and consumption. In most of the world, this would mean nothing. In China, it establishes the arc along which microfilms are set to develop. Or not develop.

A Different Media Market

By definition in China, the media is controlled by the Party. As such, media implicitly plays a different role in Chinese society than it does elsewhere: it performs the function that the Party sees fit.

And media is seen by the Party, first and foremost, as a tool of social administration: a means of communication between the Party, via the government, to the people, designed to support the Party’s goal of sustaining social harmony and support for the Party. Only after that is it seen as a means of conveying entertainment to the people, or as an industry to employ people and generate economic activity.

The mainstream media – newspapers, magazines, books, recordings, live performances, radio, film, and broadcast television – all began in post-revolutionary China in organizations controlled by the state. State control was axiomatic, and the Party created – and later, vetted – all content.

But when new media began emerging to challenge the state’s media monopoly – starting with cable and satellite, but soon moving on to the Web, games, blogs, and social media – the state made it clear that it saw these as subject to its monopoly, whether by licensing or by direct control. It seems unlikely, therefore, that microfilms will escape official notice and regulation.

The Coming Reckoning

So how will this roll out for microfilms? There are two likely outcomes. On the one hand, if the organs of the State Council and the Party Publicity Committee approach them as an undifferentiated part of the mass of videos finding their way online in China, microfilms will ride along with whatever the future is for online video as a whole.

But if those government and party offices for whatever reason decide to see microfilms as a separate development – especially if they become a real, vibrant threat to the growth of China’s mainline film industry, or if they become an outlet for political angst – then microfilms will be treated as a new medium, and they will face turbulent times.

In China, the government tends to go through four stages in the journey to legitimizing a new medium. This is not a formal process as much as it is a modus operandi, but it has been remarkably consistent over the past two decades.

Ignorance – First, the government will decline to pay official attention the microfilm phenomenon. It will, instead, take a stance where it officially ignores the media, all while watching it out of the corner of the eye. This tacit approval allows the government to wait, watch, and bide its time before stepping in.

Reaction – Finally, when somebody makes and distributes a microfilm that crosses an invisible political line and causes an uproar, the government will be left with no choice but to step in and take action. The move will be to slam on the brakes, possibly making the production and/or distribution of such films illegal, and ordering sites like Youku and Tudou to cease production and distribution.

Experimentation – When the government acknowledges the benefits of microfilms (assuming that it sees them,) it will begin a gradual process of experimentation. That might developing a licensing regime and framework that will ensure the films support – or, at least, do not operate in direct opposition to – the state. Alternately, the government could mandate that all microfilms are only distributed through government-approved sites. In the worst case, it would restrict the production of all such films to state-owned entities. Either way, the process will forge a sustainable framework under which microfilms can be made in China.

Accommodation – Once the framework is in place, the government enters a phase of fine-tuning that system, opening it up to more participants, or to less, or under different conditions.

Softening the Blow

It is important to remember that at any of these stages, there is room to influence the process, to soften the government’s approach. The degree to which this is successful depends on the unity of the participants in the process, and the level of self-regulation (read “self-censorship”) the parties are ready to engage in.

For many media – blogs, microblogs, and other user generated content – the process of reckoning with these developments saw the government turn to the platform owners to control the content. The platform owners, in turn, subjected users to rules that would see their content deleted and accounts closed if they posted political or prurient content. That allowed for a relatively easy solution.

If the distribution of microfilms remains limited to sites like Tudou and Youku, the government may not see a need for much further regulation – the authorities already have clear understandings in place with the online video sites, and keeping track of the few dozen microfilms each week is a simple matter.

But the prospect of getting a large group of producers and directors of these films to sign up to a means of self-regulation seems slim, and if distribution goes outside of those channels that the government can control – if peer-to-peer sharing kicks into high gear, for example, the regulation will have to happen at the source. And the government will have to make its controls draconian to enforce control on people making movies with phones, handhelds, and laptops.

Media will Serve

The Party’s broader policy direction of late does not seem to augur a greater opening to ideas and an independent media industry, even though the past twenty years have proven to China’s leaders that absolute control in an age of user generated media is practically impossible.

But when the government needs to use media – including its policies on its use – as a means to sustain social stability, regulators see it as their duty to ensure that media serves the needs of the state. As flexible as the medium may be – and microfilms are an exercise in flexibility of topic, format, creation, and distribution – the government has proven itself increasingly deft in crafting regulatory regimes that permit new media to operate on the Party’s terms.

At some point, microfilms will face a reaction. What filmmakers have to do is decide whether they want to avoid that reaction – or provoke it – as a pathway to a stable, legitimized future, or to another kind of future entirely.

Hutong Forward
An undisclosed location
in the American Midwest1649 hrs. local

Happy shoppers (Photo credit: Phillie Casablanca)

A contentious debate about China in the media industry is whether or not Chinese will pay for content. Most intelligent observers would answer no: Early experiments selling music were not encouraging, and with search engine Baidu offering links to free downloads, and later a legitimate streaming service, China’s mostly-young internet users could be forgiven for thinking “what’s the point of paying?”

Indeed, piracy of music has been so rampant that many thoughtful commentators, including Eric Priest at the University of Oregon, have championed the use of “alternative compensation systems” that presume that nobody will pay for the content itself. Like, ever.

At the China 2.0 conference at Stanford last month, there was gloom in the room when the people funding content plays took the stage. Annabelle Yu Long, the CEO of Bertelsmann’s China Corporate Center and managing director of the music giant’s Asian investment arm, noted that China, with a quarter of the planet’s ears, represented only 2% of Bertelsmann’s business, and this after decades of effort. The rest of the money people on the stage – Jenny Lee of GGV Capital, Raymond Yang of WestSummit Capital, and David Chao of DCM – Chinese all, agreed with the simple proposition that the Chinese do not pay for content, ergo they would not ever pay for it. As it is, so shall it ever be.

Getting Beyond ASCAP’s Messages

But as the discussion at China 2.0 progressed, and the panelists exhausted their messages and began to share experiences, a more nuanced truth came out. After talking about music, ebooks, and even movies, one of the panelists summed up by saying that as Chinese users become more prosperous and as quality and convenience become more important, they are proving themselves willing to pay for music, movies, and even ebooks.

Two days later and an hour away at the annual conference of the Hua Yuan Science and Technology Association (HYSTA), the discussion was more optimistic. Oliver Lu of AppAnnie showed a chart that compared app downloads in China over the past several years to app revenues. Interestingly, over the past three quarters, the rate of growth of revenues has passed – and nearly doubled – the rate of growth in downloads. Chinese are starting to pay for apps. The numbers are not huge – your average Chinese spends 1/12 of the average Japanese user on apps – but the trend is clearly pointing in a positive direction.

Play with Me, Pay for Me

The difference lies in a generational shift – as well as a cultural shift – in consumption and a presumption of value. My generation thinks of content in terms of music, video, movies, and books. China’s post-80s and post-90s generations, on the other hand, grew up eschewing those formats because those were the most tightly controlled and least interesting.

Instead, they grew up playing games, and that cohort is only just reaching the age where they can afford to pay good money for their interactive diversions. Over half – 53% – of the revenue of Tencent, China’s huge portal and social media player, comes from games, which are now a $6.3 billion business in China, more than search advertising and display advertising combined. Ten of the top ten downloaded mobile apps in China are games.

A Future that Pays

That’s great for game developers, you’ll think. But what about everyone else in the content business. But that is exactly a the point. Once you get Chinese used to paying for one form of content (games), the door can then open for them to start paying for other forms. Develop the habit, create a value around legal versus pirated downloads, and you are on your way.

Call me a pollyanna, but it genuinely seems too early for the content makers to write China off. Use models like Eric Priest’s in the meantime if you have to, but lay the long term groundwork so that when your audience has more money than time, you are ready to capitalize on a very different kind of Chinese content consumer.

Note: Over the summer I taped a segment for Thoughtful China where I talked briefly about what agencies to use for social media. The response has been huge, so I wanted to expand on my point here, especially as so many people are in the later stages of planning their China marketing efforts to begin after Chinese New Year.

Internet cafe in Yunnan (Photo credit: sweart)

Most companies in China have yet to realize out that making the best use of social media demands more than a twenty-something customer service person posting links to content on the corporate website. This is understandable: social media is a relatively recent phenomenon (compared to, say, print media, or even the web), and the art of using social media for business is evolving with blinding speed. That means that today’s smart social media strategy is obsolete tomorrow.

This has provoked the companies who want to stay ahead of the game to turn to outside agencies. Unfortunately, the solution is more confusing than the problem. Jockeying for relevance and revenues, nearly every kind of agency in the marketing business is cooking up products and services to help companies handle their Chinese social media programs. Social media absorbs so much of the Chinese public’s time and attention that agencies feel they either must create a social media offering or consign themselves to the junk pile of history. The one-upsmanship between agencies is earnest, and sometimes desperate.

Elephants and blind men, meet social media and agencies

That would be fine if the solutions proffered were similar. They’re not, because each type of agency sees social media through its own prism, and approaches the medium accordingly. Advertisers approach social media as another form of advertising, or as an appendage of offline campaigns. PR people approach it as a fast channel to reporters or as a way to bypass journalists altogether. Digital agencies approach social media as a way to drive hits to digital content lodged elsewhere. And social media specialists want us to believe that social media is so different that it demands a special mojo, and it should be left to them as experts.

Ultimately, the agency a company ends up choosing for social media management is usually a function of how the firm has organized its internal marketing function. If there is a social media team, the agency is likely to be a specialist social media house (after all, if you are a specialist in social media, how would it look if you hired an ad agency?) If, on the other hand, advertising covers social, the ad agency will get the nod. And so on.

(I won’t bother to talk about companies who hire agencies to scoop up masses of zombie followers or who astroturf social sites with fake laudatory posts: any firm engaging in that kind of behaviour is going to get its just desserts in the form of bad publicity and ultimately negative ROI).

Social Done Better

This approach is understandable, but it is bass-ackward. What social media does that is unique is provide a space where people, not brands, dominate the channel. It is a space that is not just about promulgating a message, but about listening, responding, and demonstrating that a brand can be a person, too.

The real ROI from social, therefor, comes from the conversations people have about a company and its products with minimal encouragement on the company’s part. In short, the he trick to winning in social media is to get other people talking about you and delivering your messages far more than you do about yourself in all other media, and the more influential those people are on the behaviour of others, the better.

For that reason, the agency that should be handling your social media in China should be:

A firm that is used to cultivating influencers over time

A firm that understands how to develop, deliver, sustain, and support powerful messages; and

A firm that knows how to monitor opinion, respond rapidly and appropriately in the face of a crisis or opportunity, whether that is a product problem or a corporate scandal.

To me, that’s not an agency full of creatives, of people who write apps, or of social media “experts.” It is, on the other hand, an agency filled with smart communicators. Find one of those, and you have found the agency to help you in China’s lava-fluid social media milieu.

Watching Channel V on a particularly jet-lagged Saturday night in Beijing, I was confronted with the MCountdown Summer Special, a live K-Pop extravaganza featuring girl-bands and a few of their male equivalents in a sort of contest, with one live performance after another. After nearly an hour of suggestive choreography, revealing costumes, plastic surgery, and male dancers used as, shall we say, props, all set to music that can most charitably be described as “unremarkable,” you are led to an inescapable conclusion: this is not music, it is soft-core porn.

For a sample, Don’t believe me? Go to your favorite online video site and look for videos by a band called “Girl’s Generation,” Korea’s own Pussycat Dolls. Try this one. Watch. Uh-huh. The appeal is decidedly more glandular than aesthetic. I don’t mean to pick on this particular group, they’re just one example of the genre.

As Richard Burger and others have proven, Asia has a schizophrenic relationship with sex. Prostitution is openly tolerated in Confucian Asia, and functional polygamy – in the form of mistresses and their male equivalents – is censured only in the extreme, usually when corruption is involved or the male shirks his marital obligations. At the same time, the region is home to some of the most repressive laws regarding pornography. Leaving Muslim Asia aside (where the public discussion of sex is limited to political spitball contests, the courtroom, and scholarly discussions on what the Koran permits), it is brutally difficult to buy, view, or download porn. Touch, the authorities seem to tell us, but don’t look.

Music videos are the exception. Across Asia they are the one place you can go to watch young, healthy, attractive females gyrate suggestively, anytime you want.

And that’s the point to all of this. If your target market is hormonally-active Asian males, regardless of age or nation, this is clearly your outlet. Forget print and movie celebs: this is where you want to spend your advertising and endorsement dollars.

China has made few concessions to the U.S. in the effort to gain more access to Chinese audiences for Hollywood films of late, and no significant concessions since China’s accession to the WTO. Then, on a U.S. visit in February, Chinese Vice-President Xi Jinping told U.S. Vice-President Joe Biden that 14 additional films would be allowed into China each year. The catch: they had to be either 3-D or IMAX pictures.

The reasoning behind this concession is not hard to surmise: the number of Chinese cinema screens has leapt to 11,000 screens after languishing for over a decade at around 3,000 screens. Why the boom? Simple: China’s hyperactive real estate developers have begun including cinemas in their commercial, retail, and mixed-use complexes throughout China’s 600 cities. Cinemas, apparently, attract the kind of foot traffic that supports retail business. Those developers wield considerable political influence, and they want more foreign films because in order to fill the seats.

Across the proverbial table are the party ideologues and China’s own film production industry whom, after decades of effort, are just starting to see Chinese going to the cinema in droves, and increasingly to see Chinese films. They don’t want to give it all away just as they’re capturing the market.

Enter 3-D.

There are over 7,000 screens in China that are 3-D capable, yet only a tiny number of Chinese films produced each year can take advantage of that additional investment. For the government to allow access to 3-D films was almost cost-free: it made the developers happy without upsetting the film industry.

This is going to be a good thing for Hollywood as well, but we must hope that the MPAA was not expecting any further 3-D slots beyond what has already been granted. Any hope of that was dashed last week by none other than James Cameron.

Mr. Cameron, the mercurial director of “Terminator,” “Titanic,” and “Avatar,” announced on August 8th that it would set up a joint venture with the Tianjin government to produce 3-D films and television content. In short, Mr. Cameron proposes to teach Chinese filmmakers how to make 3-D content of their own.

As I’ve noted before, China’s goal is neither to partner with the U.S. in the movie business, nor focus exclusively on its large and growing home market. China – and by that I mean not only China’s film industry but also the central government and the Communist Party – has every intention of competing with the U.S. and European film industries globally and, if possible, beating them. It is only realistic to see any partnerships with and concessions to Hollywood in the light of that effort.

One hopes Mr. Cameron understands his role in The Big Picture: China will happily use the Cameron Pace Group as a means to learn how to make fantastic 3-D content. Once that is done, Chinese 3-D filmmakers will not only be able to fill the growing number of 3-D cinemas at home, they’ll come gunning for Hollywood in its own increasingly-essential overseas markets. Cameron Pace may make a lot of money, or it may not. It will certainly make a competitor for Hollywood in 3-D.

Mr. Cameron may not mind: he’s near enough to the end of his storied career not to care. At the same time, you have to wonder how the students at NYU, USC, and the Directors Guild might feel about it.

The deal is interesting for several reasons. First, it marks a strategic departure for News Corp., which has in the past preferred to own larger stakes in its China ventures. It is also the first major investment News Corp. has made in traditional media since 2006, when CEO Rupert Murdoch told a meeting of industry executives in New York that he’d hit “a brick wall” in China.

Second, it is interesting because News Corp. is now leading from behind in China, preferring to play a fast second rather than trying to beat the rest of the industry. Similar linkages between Legendary Pictures and Orange Sky Golden Harvest, DreamWorks Animation and Shanghai Media Group, and Walt Disney and the Ministry of Culture/Tencent have been announced over the last year.

Despite some secrecy around specifics of the deal and Murdoch’s real intentions behind it, the move represents a wiser China strategy than News Corp.’s previous, dingo-in-the-butcher-shop approach. The history of foreign business in China has been dominated by a preference for speed over calculation: if we don’t get in early/first/biggest, the thinking went, we have no chance of success. It now seems that Murdoch has learned from costly experience the fallacy of such thinking, and now that Legendary, DreamWorks, and Disney have paved the way, he has followed.

Neither News Corp. nor its CEO have been idle these past six years, either. A quiet charm offensive has apparently been underway for at least the past two years, a period during which I think News Corp. has done a lot of listening and learning, understanding what is possible and permissible for a foreign media company here, and calibrating its ambitions accordingly. Many whom have dealt with the News kraken or one of its tentacles can attest that this is an uncharacteristic approach: normally it is News that defines what is possible in a given market.

I suspect, therefore, that this is a first step for News with Bona, and that we can expect the relationship to mature and expand based on the signals that come from the Party and the market in the next several years.

There is some new content in the regulations issued yesterday, but contrary to the NYT headline, the major issues addressed vis-a-vis foreign content are not new: indeed, they harken back to regulations that have been in force since 1995. From the unpublished manuscript of a guidebook on Chinese television that I co-authored with William Soileau and Jeane-Marie Gescher in 1998, according to regulations then in force:

Foreign programming must not be distributed between 6:00 p.m. and 10:00 p.m., although actual enforcement varies according to the broadcaster.

and

Foreign programming must not take up more than 25% of total broadcasting time on a station basis. In reality, while the rule is nominally honoured, many networks apply the quota on a channel by channel basis. Unofficial figures indicate that foreign programming may account for as much as 50% of programming.

The rules governing television are not increasing, as the Times suggests. What seems to be increasing is the degree to which they are openly flaunted by broadcasters. Let me explain.

China has had a wide range of laws and regulations restricting media (and many other industries) in place for a long time. What varies is not the regulations, but the degree to which they are enforced. Laws and regulations, as such, are not de facto restrictions of behavior so much as they are tools for the government to use when political conditions demand it. For that reason, what SARFT does on a fairly regular basis is issue notices designed to remind broadcasters that the regulations exist, and signal to them that enforcement looms. Usually, such initiatives come either when things get too far out of hand (i.e., 25% becoming 50%, as suggested above), or when something happens to make it an issue (Chinese producers complaining about access to TV time, or, say, a leadership change.)

This is not dissimilar to the way I get my ten-year old to clean his room: I let him know an inspection is coming, and by the time I get there, behold! A clean room! The requirement to keep his room clean always existed. What was lax was the enforcement. What caused me to issue the edict to my son was either the room was getting too messy, or guests are coming over.

Jacobs quoted one Chinese citizen posting his disgust with the regulations on Weibo: “They should really put Sarft in charge of food safety and have the State Food and Drug Administration regulate TV shows — that way we’ll have safe food and good entertainment.”

I would wager the person posting this was either very young or unborn when the regulations were actually issued. The issue that has provoked SARFT (an underfunded, undermanned, out-gunned agency if there ever was one) is the same that caused the food problem: China is ruled less by policy than law, and political expedience trumps enforcement – until the political expedients change.

UPDATE: Please read the comments conversation between Li Yuanyuan and myself. He raises some excellent points to rebut my point of view. He disagrees that enforcement was ever lax, suggests that it was always tight, and he explains why. We do not share the same memory of events, but he does point out that the prime time ban on foreign programming and the restriction of quantity of content was not in the 1995 Regulation #549.

“The Hunger Games” is apparently scheduled to show in China, according to this piece (h/t to Jacqueline in HK, aka @lantaumama for this.)

This movie, based on the first book of a trilogy telling the tale of a hardy young woman who inspires a rural uprising against a brutal repressive urban dictatorship, will either be pulled at the last minute when the censors actually WATCH the darn thing, or it will be the most subversive piece of democratic propaganda ever to sneak onto Chinese screens.

Or, as occasionally happens, the Chinese audience will take something entirely different from the experience than we would.

If one conclusion stands out after all of the panels at the Cable and Satellite Broadcasters’ Association of Asia (CASBAA) conference this week, it is that all of the broadcasters in the region see the challenge posed by New Media (even China Central Television [CCTV]), and none of them are quite sure what to do about it. As one CCTV executive told me, “we all acknowledge now that new media, the Internet, and mobile are the future, and that we want to be a part of that. But the question is ‘how’?

Steve Garton of Synovate suggested in a well-attended breakfast meeting that part of the answer lies with apps. In his presentation, Steve made the case to the region’s broadcasters that they needed to get better at using mobile apps to distribute their content on smartphones and tablets. Specifically, Steve noted that his company’s research around the world had proven that the best way to get in front of users would be for a broadcaster to have its app pre-installed on phones when sold.

It is not hard to foresee an edict from the Central Government requiring all carriers selling smart phones to include a CCTV app on those devices, and the numbers suggest that the Party needs to start looking at mobile as a means to ensure that it is still reaching China’s post-90s generations. According to Flurry Analytics, China began 2011 ranked 10th in the world in the number of global app “sessions” on smartphones and tablets. Growing 870% in the first 10 months of this year, China has passed every country but the US and now ranks second worldwide in app use. And one of the top 10 must used apps? Youku, which, by the way, comes pre-installed on many of China’s handsets and tablets.

I’d wager CCTV and the other broadcasters will not long permit Youku exclusive rights to that space, but all of the terrestrial and cable broadcasters face the same problem: how to attract the user to their apps when those users do not watch the stations? And if they collaborate with Youku and Tudou to distribute their content, what value do the broadcasters add? And what happens to their brands?

We cannot yet rule out the possibility that the broadcasters will move to create a Hulu-type service and pull their content off of the other sites. But that still leaves them with a large back of programming all in one place, and the brutal challenge of getting people to actually use the service. And for all of their production and engineering prowess, Chinese broadcasters are not the bastions of marketing that their U.S. counterparts have been.

For these reasons, the question of how broadcasters will deal with apps and mobile seems to point toward the same eventual solution as do the tricky politics and economics of the broader online video sector: eventual mergers between the broadcasters and the major online video sites.

In a recent profile of Michael Lewis, arguably the leading long-form journalist of our age, New Yorkmagazine’s Jessica Pressler quotes her subject on the gulf between journalists and the people and organizations they cover:

It is amazing how much contempt there is for the professional media that surrounds any given enterprise,” he says. “I find it all the time. Silicon Valley entrepreneurs think the tech journalists are all stupid. The sports people think that about the sports journalists. They don’t say that to the sports journalists, because they want the sports journalists to be nice to them. But the level of contempt is very high.

As someone who is called upon to bridge the gap between companies and the media who cover them, I can attest that this contempt, mixed with more than a little fear, is a problem here in China as well. In defense of the companies, part of that contempt is self-inflicted: any journalist who cheapens himself and his trade by taking payment or expensive gifts from a company he covers earns his full measure of scorn and contempt, and splatters his fellow journalists in the process.

But it is not always justified, in particular in the case of the global media. There are hacks in every crowd, to be sure, but China has been blessed with a crop of some of the most astute, erudite, and talented people ever to face a daily deadline. I challenge anyone to impugn the intelligence or abilities of people like Andrew Browne at The Wall Street Journal; Tania Branigan of The Guardian, Louisa Lim of NPR, James Kynge (formerly of the Financial Times), Charles Hutzler of the Associated Press, Barbara Demick of The Los Angeles Times, or anyone working behind the veil of anonymity at The Economist, including their most recent addition, Gady Epstein. And for every one I mention, I am skipping a half dozen of equal or greater talent, as well as those who have been here and left, like the brilliant James Fallows.

Granted, engaging with foreign correspondents can be painful at first: there is much to explain about one’s business and industry, because most of these reporters are by necessity generalists. One executive complained to me that it was a lot of trouble to explain the basics of their business to someone who had not bothered to do the research ahead of time. My response to him was that as bright as these folks are, they are also under the constant gun of a deadline and cannot always afford to do the research ahead. But a stupid question is a golden opportunity: when a foreign correspondent asks you to explain your business in your terms, it doesn’t get any better than that. And nowhere do those opportunities crop up more often than here in China, especially Beijing.

A generation ago, the “best and the brightest” young stars of international journalism made their careers covering the Vietnam War. Today, many are making or sustaining their careers by covering the rise of China. If your company is not taking advantage of that opportunity, (and plenty of both Chinese and foreign companies are blowing that one terribly,) what excuse do you have?

“I consider The New York Times news,” he said. “Fascinating news. It has been sitting in judgment of America for more than a century and it, too, should be looked at in detail with the same objectivity.”

As the New China News Agency, Xinhua, takes over a 60 foot by 40 foot billboard in Times Square in New York, the same could be said for that media outlet. Xinhua is news. It has been the media mouthpiece of the world’s largest nation for over six decades, and it should be looked at in objective detail.

Why Xinhua is Important

This is more than just China-watcher or media maven esoterica. As we move into the fifth generation of Party leadership in the coming 24 months, we will be taking a further step away from the rule-by-individual that characterized the first four post-revolutionary decades. We are well into an era where China’s single-party state is run by the construction of a consensus on an issue-by-issue basis. Where once sat rubber-stamp toadies now sit leaders whose support is required for every significant initiative and action taken by the central government.

The consensus-building usually takes place behind closed doors, but when a particularly contentious issue arises, or when a relatively small group is trying to champion an initiative and is having a hard time building support, the process bursts out of those rooms and into certain government media in the form of an isolated quote in an innocuous article, in an editorial, or in an analysis piece.

The challenge for those of us trying to navigate our way through China’s political fog is deciding whether one of these journalistic tidbits means we should sit up and take notice, or whether it is so much positioning. To understand this, we have to understand how Xinhua’s role is changing.

Not Just Aparatchik Heralds Anymore

Is Xinhua a government mouthpiece to the extent that its positions reflect those of the Party? Is it more independent, and thus free to post articles like this without regard to policy? Or is it somewhere in the middle: that Xinhua is a tool used at will by various Party leaders to incite or test wider support for a possible policy change?

While it was once the former, I suspect that it is becoming a combination of both the former and the latter. And for that reason Xinhua demands study. We have to understand when Xinhua is floating a trial balloon on behalf of, say, a vice-minister of Finance, or when it is presaging a critical policy change. Regardless of your vocation, if China touches you or your work, that is an essential distinction.

So rather than continue to dismiss Xinhua as a hand-in-glove extension of the Party (which I have to confess I have long done myself), we need to recognize that it is becoming one of the most important media companies on the planet, offering more than just prepackaged propaganda for the Chinese masses, but actionable insight into the Chinese polity and society. The microscope that media watchers once turned to The New York Times, The Washington Post, Time-Warner, Disney and News Corporation must now be focused on the most enigmatic specimen of all.

In what has to be one of the best almost-postmortems of an Internet company I have ever read, Bloomberg BusinessWeek’s Felix Gillette’s June article on “The Rise and Inglorious Fall of MySpace” offers a set of insights that apply far beyond the doors of the benighted (and recently sold at a 94% write-off) social network pioneer. I have extracted three lessons that I think are particularly germane for online companies in China.

Perception is Reality

Social networks are sufficiently new that they are still a little scary to your average consumer, less so than space tourism, perhaps, but more so than a trip to the grocery store. Fears about privacy, identity theft, stalkers, pedophiles, and a host of unseen and unimagined dangers lurks in the subconscious of even the most adventurous user. As willing as we are to flock to something new, we will take flight like spooked ducks if our sense of security is credibly threatened, leaving a once-hot network foundering. As Gillette notes:

One of the reasons social networks are so combustible is that they have proven to be particularly sensitive to public perception. In February 2006, Connecticut Attorney GeneralRichard Blumenthal announced that he was launching an investigation into minors’ exposure to pornography on Myspace. The subsequent media frenzy helped establish the site’s reputation as a vortex of perversion. “If you have a teenager at home, odds are they’ve visited the blog site myspace.com,” Hannah Storm warned CBS News viewers in 2006. “And there are fears that this popular social networking website, and others like it, have become places where sexual predators easily prey on children.”

Researcher [Danah] Boyd of Microsoft believes that alarmist press ended up crippling the company. “The news coverage of teenage engagement on Myspace quickly turned to, ‘Oh my gosh, there are all these bad teenagers doing bad things and this is crazy!’ ” says Boyd. “Quickly, it turned into a big narrative about how this was a dangerous, dangerous place.”

This situation brings to mind an editorial that serial entrepreneur and Mahalo.com CEO Jason Calacanis wrote in 2008, suggesting that Internet startups didn’t need PR people, and that the CEO can and should be the PR guy for a company. I am inclined to agree with Calacanis to the point where the CEO is the chief spokesman for a company with media, bloggers, analysts and the general public, presuming of course that the CEO is not a reclusive nebbish who gets flop-sweat in front of reporters (and there are plenty of those.)

What the MySpace case suggests, however, is that somebody on staff or on retainer needs to be spending his or her days anticipating and addressing potential scares and other reputation busters, because waiting for such things to happen and then responding is already too late. As quickly as MySpace reacted, reaction was not enough, and in a world with five-minute news cycles it never will be. Besides, a CEO has far more things to worry about. And how IS Mahalo doing these days, Jason?

If It Does Not Look Broken, You Aren’t Looking Hard Enough

The old expression that “a rising tide raises all boats” has an unwritten corollary that applies to fast-growing businesses: “a rising tide covers all rocks.” High growth can mask a huge range of fundamental problems, and smart companies like Amazon go and dig them out even when they aren’t real problems. They understand that failure to do so will only mean problems later, when the growth slows, the tide goes out, and the rocks start sticking holes in the boat.

MySpace did not. As Shawn Gold, former head of the company’s marketing and content efforts, told Gillette, “when you’re growing at 300,000 users a day it’s hard to imagine that you’re doing anything wrong.”

In retrospect, that sounds almost delusional, but you have to be in one of these organizations to realize how dead easy it is to overlook or ignore critical problems. Hubris is as easy to catch as a cold when things are really good and you are being lionized by media and users alike, and even those immune to the hauteur virus are likely to be so wrapped up in just keeping the wheels on such a fast growing organization that they set “important but non-urgent” problems aside.

Companies have to build such organizational debugging into their culture and allow time and resources to address those issues. MySpace, by the admission of both Gold and its founders, were more seat-of-the-pants, and they paid for it.

Leaders Must Be Users

MySpace co-founder Chris DeWolfe made a point he felt was critical to the company’s long, slow slide to the middle of the social network pack:

“After we left, the guys that took over were never Myspace users,” says DeWolfe, who now runs a startup called MindJolt. “They didn’t have it in their DNA.” According to a source familiar with the sale, DeWolfe is also a finalist to buy the company. DeWolfe declined to comment.

This might be so much positioning, or even a bowl of sour grapes given the rough handling News Corporation dealt to the MySpace founders when they were shown the door. Let’s resist the temptation to get all ad-homenim for a moment and look at his point.

The owner or executive of a media company has to be in the audience, and for social media he or she has to be a participant. There is simply no other way to understand or manage the business. The idea of a newspaper executive who cannot read or a movie mogul who won’t watch films is ludicrous. It is the same for online companies, and especially social media.

This is particularly relevant for foreign companies setting up online businesses in China. You do not want to put someone in charge who is not a user, or, worse, who because of a language or cultural barrier is unable to be a user. The experience for these companies, not the content, is everything, and if you cannot evaluate the experience you have no business being in charge.

Don’t Go There

The history of social media and the Internet is sufficiently short that we should be squeezing as many lessons as we can out of every case. We will be analyzing the MySpace story for years, but Gillette gives us an excellent starting point. This is a superb article that should be mandatory reading for anyone putting their money into an online company, particularly in China, where we enjoy a surfeit of engineering talent and suffer from a dearth of capable managers.

As the world is treated to daily revelations centered around the defunct British tabloid News of the World, I am slowly crawling out of blog hibernation here at Hutong West, so to get things going a few comments on the News of the World scandal are in order. While analyzing this unfolding train wreck would be premature, there are several points that need to be made right now.

Before I begin, however, for the sake of full disclosure I must say that I am not in the pay of any organization with ties to News Corporation, nor am I a fan of either News Corporation or any of the Murdoch family. My writings should give ample support to that contention. As such, what is written below is meant as neither defense nor condemnation of either the company or its controlling family.

To The Grave Dancers of Fleet Street

Yesterday, the editors of The Wall Street Journal, in a sanctimonious, blame-shifting editorial defense of News Corporation that ill-serves the paper and its outstanding journalists, manage to make one point that strikes home. The media establishment is doing neither itself nor the public a service when it allows schadenfreude to seep into coverage of News Corp’s troubles.

One need only read headlines to imagine the gleeful editors and publishers who composed them: “The Tables are turned on Murdoch” crows Joe Nocera at The New York Times; “Just deserts for Murdoch” shouts Richard Cohen from the pages of The Washington Post. The blog and online coverage is downhill from there. As for the Times, once the standard-bearer of American journalism, Nocera goes so far as to try to make a virtue of a vice, explaining:

Well, yes, the schadenfreude is pretty darn thick. Who would deny it? The whole thing reminds me a little of the ending of Ian McEwan’s wonderful novel “Solar,” in which the many awful things the central character has done in his long life suddenly come together to bury him in an avalanche of comeuppance. I’m O.K. with that.

Joe is okay with that. And that is a worrisome problem.

Rupert Murdoch has made his share of enemies in the process of building News Corporation, many of them in the media industry, and some of these among the ranks of those with the power of the printing press. There is no shortage of people who have waited for a very long time for Rupert and his empire to get their requital. Further, I’m all in favor of companies sowing truth-based fear, uncertainty and doubt about competitors.

These are, however, extraordinary circumstances. If this scandal is as serious as it appears, the media have an especial duty not only to get the story right, but to maintain both the reality and appearance of balance in its coverage given that the target is a successful rival. The appearance of balance is eroded when you are reporting the story on page 1 while sticking it to Ol’ Rupert on the opinion page. Once that happens, it starts to smell like someone is settling scores, and the credibility of an important media outlet is undermined. That’s not serving the public or the media.

There will be plenty of time for schadenfreude when this is all over, and once more when the better reporters on this story line up to collect their Pulitzers. For right now, stick to the facts, folks, and take a little less public joy in the trials of rival: you’re starting to look exactly like the thing you hate the most: a pack of bloggers.

Rupert Is Not Going Anywhere

While there have been early reports that News Corp is considering replacing Rupert Murdoch as CEO, I would not give them much credence. Corporate watchdog Nell Minnow doubts the ability of the News Corporation board to do anything without the express, prior approval of Mr. Murdoch, so there are probably only two ways that Rupert will surrender leadership of NewsCorp: either at his own choice, or if they carry him out feet first under a sheet.

In a fawning editorial that compares Mr. Murdoch to Alexander the Great, Forbes publisher Steve Forbes promises us that Murdoch will survive and fight another day. In a rather less complimentary column in The New York Times, David Carr concedes that the News Corp. CEO still has his teflon armor:

Even as the flames of the scandal begin to edge closer to Mr. Murdoch’s door, anybody betting against his business survival will most likely come away disappointed. He has been in deep trouble before and not only survived, but prospered. The News Corporation’s reputation may be under water, but the company itself is very liquid, with $11.8 billion in cash on hand and more than $2.5 billion of annual free cash flow.

For better or worse, K. Rupert Murdoch is News Corporation. As long as there is a company, he will be calling the shots.

Aid and Comfort

What is most disturbing about this scandal is the impression it leaves in the minds of the people and government of China. In the west, we are fond of portraying a free and independent media as watchdog against lawlessness, corruption, and the abuse of power. As a whole, the media serves that function brilliantly around the world.

But if the allegations about News of the World are proven true, and worse, if the illegal and anti-democratic behavior extended beyond that single paper to elsewhere in the News Corporation empire, then the people and leaders of China can make the point that an overly independent media can actually become a vector of lawlessness, corruption, and the abuse of power. Under such circumstances, could China’s leaders not make a rational case that rather than have a media industry so powerful that government is in its thrall that it would be better for government to control the media?

You can bet China’s leaders will make that point, if they have not already. That can only be counted as a blow against progress in the world’s largest nation, a blow that must count against whatever good News Corporation did for media in China.

Since China began the reforming and opening process in the late 1970s, a small number of industries have been held outside the reforms that most other sectors have enjoyed. One of those industries has been the national defense complex, and the other has been media.

The media and entertainment sector in the world’s largest and most entertainment-hungry market has been kept in the hands of government at the insistence of the Party. This has meant that the government has rebuffed not only attempts by foreign investors to buy into domestic traditional media properties, but similar attempts by powerful local companies as well.

The result has been the anemic development of the domestic media industry, forced as it is to rely on its revenues, the government, and ingenuity to support its efforts. This has been particularly challenging for the film and music businesses in China, making it difficult for those businesses not only to finance new projects, but to make long-term capital investments and to attract and retain talent.

Not so constrained have been new media companies, in particular the online video websites, the largest of which are taking foreign venture capital investments, conducting offshore IPOs, and starting to produce their own television/video programming. This contradiction is a latent problem in Chinese policy, one that is frustrating to the leaders of China’s state-owned traditional media, and it becomes more severe as the online video sites grow in revenue and production capacity.

The government will have to level he playing field at some point. They can do so either by forcing the online video sites to buy out their foreign investors (not so easy after an IPO,) or by allowing traditional media companies to seek outside investment. The latter would mark a radical shift for Chinese policy makers, and one fraught with risk. The implicit belief in Beijing is that once private interests control media, the Party loses control. In China’s system, this risk is nigh unacceptable.

But there are some signs that the party is willing to experiment with a degree of private ownership in traditional media. South Africa’s NASPERS has long held an interest in Beijing Media Corporation, a marketing and advertising vehicle for print media in Beijing, and a joint venture with Anhui Daily Newspaper Group. These deals took place with the implicit approval of the Party, and it appears they are being watched with great care.

That degree of experimentation appears to have now extended to film. Last week, Beijing Xiangqiao International Media, a film and animation production company and subsidiary of state-owned Hunan Broadcasting, went private in a management buy-out, and there are apparent plans for a domestic IPO at some point in the future.

This will be an important development to watch. If this is allowed to go forward, this marks a limited but key precedent for wider privatization – and private finance – in China’s growing film industry.

This could also be a watershed moment for online video providers like Youku (YOKU) and Ku6 (KUTV). If regulators are prepared to allow domestic production houses outside investment, it could mean that they are also prepared to allow Youku, Tudou, Ku6 and others to continue their evolution toward becoming integrated media companies.